Community Bankers Paint Rosy Picture For 2003

Source: Grant Thornton

Grant Thornton's Tenth Annual Survey of Community Bank Executives shows an industry optimistic about the coming year, with 81 percent reporting a positive outlook (44 percent good; 32 percent very good, 5 percent excellent).

Regardless of the future outlook, competition from within the banking community, and from non-banking companies, is on the rise. This year, other community banks (75 percent) and credit unions (68 percent) top the competition list, but non-financial institutions, such as Wal-Mart and ExxonMobil SpeedPass, are gaining ground with 26 percent of the responses - four times last year's 6 percent.

"Although competition both from within and outside the financial institution industry continues to concern community bankers, they are diversifying their customer offerings to retain current customers and attract new ones," says Paul Pustorino, partner in charge of Grant Thornton's financial institutions practice.

Growth strategies

Consistent with their optimistic outlook, community banks continue on a growth curve through expanded product and service offerings. Mortgage products (88 percent), debit cards (88 percent), and electronic bill payment (58 percent) top the list of offered services and products.

Offering products and services for individual customers, however, is not the only growth area bankers are exploring. One-third plan to acquire another banking institution in the next three years, 75 percent believe that expanding services for business customers is important to their continued success, and 76 percent expect to increase their number of commercial accounts over the next three years. Pustorino relates this diversification to the varied and increasing needs of the marketplace. "As the needs of banks' communities and customers change and expand, community bankers must adapt and establish products and services that meet these ever-changing demands."

Managing the business of banking

With the ebb and flow of interest rates, and the long laundry list of state and federal regulations, mitigating risk is a top priority for community banks. The majority of community bankers agree that controlling credit risk (92 percent), managing interest rate risk (89 percent), and complying with regulations (85 percent) are important to their continued success.

Community bankers rate themselves moderately in their performance in these areas: two-thirds are confident in how they manage credit risk (68 percent) or interest rate risk (67 percent), and three-quarters (76 percent) are comfortable with how they comply with regulations. And, 83 percent of community bankers are confident in the quality of their financial reporting.

The impact of Sarbanes-Oxley

As one of the most regulated industries, for the past decade community banks have been held to higher corporate governance standards than most other businesses. Sarbanes-Oxley, however, has caused some bankers to look even more closely at their corporate governance policies.

"Solid corporate governance policies are a daily concern for bankers who reference volumes of regulations to ensure they are in compliance," Pustorino says. "But, recent corporate scandals and expanded regulations have strengthened financial institutions' resolve to mitigate inherent and potential risks."

One area of concern is the make up and protection of boards of directors and audit committees. In light of Sarbanes-Oxley, 33 percent of community banks have reviewed their liability insurance or have provided financial education to their board of directors (32 percent).

And, by the end of 2003, 25 percent of community banks - 38 percent of publicly held - expect to have audit committees comprised solely of outside directors, including one who meets the Securities and Exchange Commission's definition of an 'audit committee financial expert.'

Making the Internet connection

The birth and growth of the Internet is one trend that has evolved during the 10-year history of the Grant Thornton Annual Survey of Community Bank Executives. In 1997, 21 percent of respondents had a Web site and 27 percent planned to develop one.

Over the past six years, banking via the Web had surged in popularity with 86 percent of 2003 respondents having a Web site and a total of 93 percent planning to by the end of 2003.

"Technology has long been a sticking point for community bankers who tend to subscribe to the methodology of, 'If it's not broken, don't fix it,'" Pustorino says, "But these bankers are beginning to realize that technology today drives banking processes from administration to financial reporting to customer service."

This is reflected in survey responses, which show that the Internet has changed how community bankers do business. Nine out of 10 respondents send and receive e-mail (93 percent) and use the Internet to conduct industry research (90 percent). In addition, 78 percent surf the Web to gather information about competitors, customers and prospective clients.

"Right now, community banks are on the right track to tapping into the wealth of resources afforded to them through technology," Pustorino indicates. "Continuing on this path will help them streamline processes, better anticipate and meet customer needs, and more effectively manage the business of banking."